Saturday, February 04, 2012

Forest City Enterprises stock jumps after decision to shift focus

Well, the stock market sure liked Forest City Enterprises' decision to divest itself of the land business and, along the way, shifting its corporate structure to have a majority of independent, non-family directors.

The stock jumped 13% yesterday, to $14.91. Last year the stock nudged over $19, while in the last five years it had risen to $70 and dipped below $4.

And Forest City ultimately should be better position to pursue projects in core markets like New York, including Atlantic Yards. (Then again, maybe they'll just keep trying to raise funds from immigrant investors.)

Conference call

A brief conference call yesterday with investment analysts shed a little more light on the decisions. CEO David LaRue explained that the land business "is very different from our rental property business... It is the biz that Forest City started in real estate over 60 years ago. It has over the years been a good business... but also very volatile.

The 35 active land projects, he said, are mostly in the southwest, Texas, North Carolina, and Ohio, aimed at single-family developments. The decision does not impact mixed-use projects such as Stapleton in Denver and Central Station in Chicago.

"We expect to recognize a non-cash impairment charge, $150-165 million pretax," he said, not including  severance. "Clearly that is a significant impairment," indicating the difference between the book value of the property and its likely market value.

So the firm will sell various assets. "Our target is to have this completed by the year end, but at the same time, we won't be rushed," he said. "This will not be a fire sale."

Board chair Chuck Ratner, the former CEO, said that the firm had made similar strategic decisions in the past, such as to get out of lumber wholesaling and assisted living. "In each of these cases, we were able to redeploy the capital into higher-return opportunities," he said.

Other changes

As for the change in the board, he said, the board determined that there "were the right things to do as part of our continuing commitment to good corporate governance." (That raises the question: has the longstanding family control been less-good corporate governance?)

CFO Bob O'Brien also introduced a new schedule of net asset value components to better explain the firm's business.

LaRue added that the firm's committed "to improve, adapt, and position the company to take advantage of future opportunity while also being responsive to our stakeholders."

One question from the analysts: will Forest City reinstate a dividend payment.

LaRue said yes, eventually: "We owe our shareholders, at the appropriate time in our own financial life, a dividend again."

No one asked a specific question about Atlantic Yards.

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